City Council OKs Tax Cut for Multimedia Firms

The Los Angeles City Council on Tuesday approved a massive tax cut for the hundreds of multimedia companies that collectively represent the lucrative cutting edge of the entertainment business.

The 12-0 vote to create a new business tax category for these firms--slashing their tab by 80%--positions the city to better compete with its smaller municipal neighbors for the burgeoning businesses.

Multimedia firms--the hot ‘90s version of L.A.’s longtime hometown industry--produce films, disks, tapes, software and other audio and visual recording devices through the integration of two or more media. They combine technologies such as computer-generated graphics and video, film, audiotapes and photographs. The new tax category also applies to firms that provide computer programming services to multimedia companies and those that develop online and Internet services.

Most of these firms and services are an outgrowth of the technological explosion of the past decade. They did not exist when rates for the city’s old and complicated business license tax code were last revised in the 1970s. Until now, the firms have been lumped in with “professions and occupations,” the highest bracket in the 52-category code.

An upcoming report on the city’s tax structure, a copy of which was obtained by The Times, notes multimedia firms as examples of companies that bear the heaviest tax burdens.

City fiscal officials said the reductions will shave $560,000 from city revenues but added that they expect to get back that and more as growing companies stay in the city or move in because of its newly competitive tax rates.

“From this point on, Los Angeles will be the capital for multimedia into the 21st century,” said Mayor Richard Riordan, who has been pushing for the measure as part of a larger campaign to make the city more hospitable to business.

“The fast-growing multimedia industry is vital to the economic future of Los Angeles,” added Riordan, who signed the tax cut measure only a few hours after its adoption by the council.

Starting with this year’s assessment cycle, the business license tax rate for multimedia companies will drop from $5.91 per $1,000 in gross receipts to $1.18, the lowest bracket. “These are good jobs, high-paying jobs, in an industry that is growing rapidly, and we are losing them to our competitors almost daily,” said Steven MacDonald, head of L.A.’s Business Team, Riordan’s special office to keep companies from leaving town and to attract new ones.

“This allows us to compete much better,” said MacDonald. “We’re very happy the City Council recognizes the importance of this industry . . . in providing the city with revenue to pay for vital services.”

Using figures from an annual survey by private consultant Larry J. Kosmont, MacDonald produced a chart showing how the tax cut positions Los Angeles ahead of El Segundo, Beverly Hills and Santa Monica in terms of what it charges for business licenses. Until Tuesday, the city’s taxes on multimedia firms had been the highest on a list of rates in 13 local jurisdictions.

Even with the new tax rate, multimedia companies in Los Angeles will pay more than they would in Calabasas, Glendale, Westlake Village, county unincorporated areas, Burbank, Torrance, West Hollywood and Culver City. Nonetheless, MacDonald said, the new rates “put us in a hugely more competitive position” when added to other factors that tend to give the city an edge in company location decisions.

The measure in effect expands citywide the tax advantages offered to some firms last year with the creation of “media districts” in Hollywood and North Hollywood. It also makes good on part of a controversial package of tax breaks and other incentives the mayor and council offered last year to DreamWorks SKG to build a new entertainment complex in Playa del Rey on the Westside.

Riordan had considerable help in getting those programs approved--from Councilwoman Jackie Goldberg in creating the media districts and from Councilwoman Ruth Galanter on the DreamWorks package. His press office, in a statement hailing the multimedia tax cuts, included remarks from both women.

But the council last week balked at a tax break that Riordan has been pushing for another industry--health maintenance organizations. Five HMOs have threatened to move to other cities if they don’t get a business license cut totaling up to $15 million a year.

Asked by Councilwoman Laura Chick to grant speedy approval to the HMO tax reductions, the council sent the measure to a committee for further study. Lawmakers said they wanted to wait for at least some findings from an extensive survey of the city’s current business tax system.

Although the full results and recommendations from the “tax equity” study are not expected until June, an interim report by the consortium of private consultants conducting it points to many problems in the taxing system. Among them:

* The city’s high taxes and fees often act as “tie-breakers” that lead firms to settle elsewhere.

* Residents pay 50% of the taxes and fees collected by the city; business pays 46%, while tourists and other visitors contribute the other 4%.

* The city’s cumbersome, complicated tax code and collection mechanisms allow an estimated 40% of businesses to escape their tax obligations.

* Los Angeles’ permit fees and entitlement process are unusually costly and uncertain, and although the city offers incentive packages similar to those in other cities, they are perceived by companies to take longer and their outcomes are seen as more politicized.

The findings echo criticisms in earlier studies, including Kosmont & Associates’ annual “Cost of Doing Business Survey” and a report by Progress LA, a nonprofit group formed two years ago to urge cost- and time-saving changes in the city’s development permit-issuing process.

The interim report made several recommendations for immediate changes, including better collection practices and higher taxes on tourists and other nonresidents. But it postponed recommending specific changes in the tax code itself, including the shifting of businesses among existing categories, until the full study is completed.

The multimedia tax cut may have been easier for the council to pass quickly because it involves many more companies--MacDonald estimates that there are between 700 and 1,000 such companies within city limits--and represents a much smaller bite from city revenues.

Others cited the urgent need to keep the highly mobile, often small and growing multimedia firms from hopping across city lines.

“We have to look at all the taxes, but we had to do something quickly for these kinds of businesses,” said Councilman Richard Alatorre, chairman of the council’s Budget and Finance Committee. “They are being wined and dined by others.”